Sun executives believe that they have a tiger by the tail.
It's not the forthcoming version of Java for desktops, which is code-named "Tiger" and has been renamed J2SE 5.0 or Apple's next version of OS X. It's the company's rapidly evolving subscription pricing model that Sun president Jonathan Schwartz believes will be a disruptive force in the market.
Speaking at the company's JavaOne conference in San Francisco this week, Schwartz promised Sun would be "ruthlessly competitive" in pricing systems.
Sun already provides a US$50 software bundle for desktops and a $100 per user, per year software stack for the enterprise. The next step is a software and hardware bundle in which customers subscribe to a set of pre-integrated components that costs less than the aggregate cost of the individual parts.
John Loiacono, Sun executive vice president of software, calls this the Happy Meal approach. You get the combo of burger, fries and soft drink for less than the price of the individual items, and you get a free toy. Sun's menu includes a wide range of compute and storage hardware, operating systems, middleware, identity management, RFID, systems management, and professional services.
"Instead of selling by silo, you offer a package of hardware, software and services," said Loiacono. "You put the pricing together by giving its NPV (Net Present Value) for a period of time." The NPV is a standard method for determining the value of a project or expenditure based on a calculation of the expected cash flow per year minus the cost of capital and initial investment.
Schwartz said Sun is using the following factors to analyse the net present value of the margins stream:
Total number of subscriptions
Total revenue per user (RPU)
Cost of user acquisition
Payback on cost of acquisition
Sun plans to offer products and services, with varying margins, and to factor subscription prices to achieve a healthy and recurring revenue stream, compared with the revenue gained from a one time, up front cost of goods and services.
Sun is testing the subscription waters with developer bundles priced at $1,499 per year over three years that include membership in the Sun Developer Network -- which bundles product updates and upgrades, tutorials, documentation, training, code samples, and other perks -- and a "free" Sun Operton-based system. Loiacono was not willing to discuss specific pricing and bundles beyond the developer subscriptions.
The recurring revenue model also has the benefit of maintaining an ongoing relationship with customers, beyond a traditional maintenance contract for some pieces of a solution, if the company can meet customer expectations. "There is a lot of pre-testing and pre-configuring before companies buy off on [a subscription]," Loiacono said.
In larger enterprises, a comprehensive, subscription-based service can make sense to a CIO, who can see the potential cost savings and reduction in complexity. However, a department manager may want some particular feature or is loyal to another vendor for a particular part of a solution. Lioacono maintained that users don't have to use the complete stack, but can substitute other vendors' hardware or software. He also acknowledged that Sun has to win on the merits of its products in each area.
It's unrealistic to believe that Sun can win on the merits of products in every area, such as RFID or Web services management. But Sun will have leverage with customers if the whole is greater than the sum of the parts. The IT executives responsible for the budget would be willing to allow for a less worthy component to be used if it is "good enough," over the objections of IT staff. It could still be worthwhile to buy a subscription, even if not all the components are deployed. Sun should also make it as easy as possible to substitute another vendor's solution for a Sun component.
To that end, Schwartz cited compatibility as an imperative. "The ability to substitute and pit one vendor against another is what customers want." The company claims that its use of open standards and Java avoids the spectre of vendor lock-in.
Nonetheless, getting in the door is half the battle, and Sun's pricing model and investments in R&D are geared to open doors in enterprises that haven't considered Sun as a core infrastructure provider. So far, Sun has about 175,000 subscribers. They are primarily pre-existing Sun customers. It's a start, but hardly a success at this point.
Fundamentally, Sun is hoping to commoditise the infrastructure required to service billions of client devices. At minimum, Sun's subscription pricing model will force other vendors to rethink their pricing and bundling scenarios. At maximum, it will resurrect Sun's fortunes. For now, enterprises should be dissecting Sun's forthcoming subscription offers and be on the lookout for new subscription-based pricing models from its competitors.